Why Shouldn't Internet Sales Be Taxed?

July 18, 2001

At first glance, it might seem fair that Internet sales should be taxed just like local sales in brick and mortar stores. However, there are benefits from state and local governments that the local customer at a traditional store receives that an Internet customer living in another state does not receive, says former Gov. Pete du Pont (R-Del.).

For instance, the in-store customer benefits from highways, police, garbage collection, planning and zoning procedures and so forth that the distant customer doesn't.

In fact, his or her purchase helps the economy of the state in which the seller resides -- adding to state income without imposing costs on that state's taxpayers.

Nor is the Internet tax free: about 18 percent of the cost of using it goes to various taxes.

Furthermore, 80 percent of Internet sales are business-to-business, which are exempt from sales taxes.

Add in exempt financial and transportation transactions, and only about 13 percent of Internet sales would even be taxable by state and local sales taxes.

A 1992 U.S. Supreme Court decision found that under existing federal law, catalog -- and thus Internet -- sales are exempt from the sales tax of a customer's locality unless the seller maintains "an actual physical presence" within the jurisdiction.

There is a good reason for maintaining that exemption: a 1998 Ernst & Young study estimated that the collection and compliance costs for a national retailer might come to 87 percent of the tax collected.